Centralized or Decentralized? That is the Question

5 min readSep 9, 2021

Cryptocurrency buying and trading has exploded in popularity, particularly over the last 4 years. Crypto holders now use their coins or tokens to purchase goods and services, or trade with peers in the broader crypto-sphere. In order to provide safe and secure places to trade online, hundreds of platforms have been created to support trades across all types of crypto tokens and coins. These platforms are collectively known as cryptocurrency exchanges.

Crypto exchanges come in different forms, each with its own benefits and challenges. Read on to find out how they work, how they differ, and why one may be better than the other.

What Is A Cryptocurrency Exchange?

In the simplest words, a crypto exchange is a place to buy, sell, and trade cryptocurrency. Each exchange has its own setup with different rules and regulations to keep transactions secure and compliant.

There are currently over 500 options for crypto exchange and most of them can be broken up into two categories: decentralized exchanges (DEXes) and centralized exchanges (CEXes). At this point, the vast majority of blockchain exchange falls under one of these categories, depending on its basic operation principles.

Decentralized Exchanges (DEXes)

Decentralized exchanges, or DEXes, are cryptocurrency exchanges that allow for direct peer-to-peer cryptocurrency transactions to take place online. With DEXes, there is no middleman between parties, and consumers are not required to share personal information to participate.

Some of the biggest DEX platforms include Uniswap and Sushiswap.

Centralized Exchanges (CEXes)

Centralized exchange, or CEX, refers to the use of a middle man or third party to help conduct transactions. Information is passed between users through a central point. These types of platforms typically require traders to submit personal information for verification.

Examples of CEXes include Kraken and Coinbase.

What Are The Pros Of Choosing DEX?

One of the main reasons users like DEXes is because they are generally much more reliable than their CEX counterparts.

They involve less surprises and more control over one’s funds.

In a decentralized system, each user holds the private keys which control access to their funds. In a centralized system, all funds are ultimately controlled by the owners of the exchange platform.

Without this additional centralized party, DEXes are safer for users because they can protect their coins and tokens from hackers or security breaches to the exchange.

Additionally, in a decentralized exchange, no funds are actually taken from the users’ hands. These systems make use of smart contracts as automated market makers (AMMs). The smart contracts that power these AMMs are immutable thanks to publicly accessible blockchain technology.

One thing important to note — a higher level of security also comes with greater responsibility for the user. If a consumer loses his or her access key, it cannot be retrieved and the user is out of luck. Most CEX platforms have the possibility of retrieving a lost password.

Many traders are attracted to DEXes because of the anonymity aspect by which participants are not required to submit their personal information in order to trade.

Why Are Crypto Users Also Attracted to CEXes?

When you hear that DEXes are more secure, provide a higher level of anonymity, and require lower trading fees, they may seem like the obvious choice for your exchange.

But while DEXes have been growing in popularity over recent years, CEXes still represent a large majority of the trading volume in the crypto industry.

As is often the case, a huge part of this comes down to ease of use. There tends to be less information and advertisement of DEX platforms. These are often much less intuitive to use, giving DEXes a major disadvantage for many, especially newcomers. Most users of DEXes really need to have advanced knowledge of how they work in order to use them efficiently.

Centralized exchanges, on the other hand, make trading crypto accessible to the masses. Once a user sets up their account on a CEX, transactions usually only require a few clicks to process.

As an added bonus, CEXes tend to have lower trading fees because of how their liquidity is centralized and how orders are filled.

CEX platforms can also attract users with the ability to offer advanced features and options that are not often available on DEX.

Another reason that more advanced traders might choose CEXes over DEXes is that CEXes offer deeper liquidity.

Because decentralized exchanges still represent a smaller amount of the trading volume in the crypto market, many trading pairs are relatively illiquid. This reality is likely to change as DEXes continue to gain popularity and new liquidity protocols emerge.

What Does The Future Of Crypto Exchange Look Like?

It’s hard to know exactly what to expect. Decentralized exchanges have been growing in popularity, and it’s possible that they could one day represent the majority of transaction volume. On the other hand, as the blockchain world gains popularity itself, more and more newcomers may be looking for the easiest way to get started and keep centralized exchanges on top. Or maybe a third option will emerge that combines the best from both DEX and CEX ? (Companies such as Unizen and Alliance Block are already working towards this type of centralized-decentralized compliant liquidity)

We can envision a day where compliant decentralized liquidity pools hosted on public blockchains will serve as the backbone powering the future of global finance across hundreds of jurisdictions.

Technology in the blockchain industry is constantly evolving, which means the conversation is always dynamic. Debating the pros and cons of DEX vs. CEX and anticipating changes is the type of topic we love to discuss on WhaleRoom.

If you’re interested in engaging in intelligent conversations about crypto projects and technology with fellow enthusiasts, WhaleRoom might be the place for you. We invite you to join our community for free to get to know some other crypto fans and learn what WhaleRoom is all about.

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